xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 0-21609

CHASE PACKAGING CORPORATION

(Exact name of registrant as specified in its charter)

Texas

93-1216127

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

636 River Road, Fair Haven, NJ

07704

(Address of principal executive offices)

(Zip Code)

Registrants telephone number, including area code: (732) 741.1500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x

Indicate by check whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405) is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrants most recently completed second fiscal quarter was $479,919.

Number of shares of common stock outstanding as of May 30, 2013: 15,536,275

Documents incorporated by reference

Listed below are documents, parts of which are incorporated herein by reference, and the part of this report into which the document is incorporated:

Chase Packaging Corporation (Chase, the Company, we, or us) has restated herein our financial statements for the fiscal year ended December 31, 2010, for the period from January 1, 1999 (inception) to December 31, 2010 and the quarters ended March 31, June 30, and September 30, 2010 to reflect managements determination that the Company had misclassified warrants and a put feature on its preferred stock as equity. Management has determined that these instruments should have been classified as liabilities.

The restatement of the financial statements relates to the accounting for the Companys private placement on September 7, 2007 of 13,334 units, each unit (each, a Unit and collectively, the Units) consisted of (i) one share of Preferred Stock, (ii) 500 shares of the Companys common stock (Common Stock) and (iii) 500 warrants (the Warrants) exercisable into Common Stock on a one-for-one basis at an exercise price equal to $0.15 per share.

The Companys original annual and quarterly reports reflect these Units as equity. The Company has now determined that the preferred stock portion of the Units should have been accounted for as temporary or mezzanine equity and the warrants should have been classified as liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity (ASC 480). In addition, these warrants were determined not to be indexed to the Companys stock, and therefore, also require liability classification in accordance with ASC 815, Derivatives and Hedging (ASC 815) as a liability. The total impact of these accounting changes is a decrease in the Companys net loss attributable to common stockholders, as originally reported for the year ended December 31, 2010 by $56,982 ($.01 per basic and diluted share) to a loss of $30,302. The restated balances at January 1, 2010 also include a decrease in preferred stock of $17,078, a decrease in additional paid-in capital of $1,516,060, an increase in deficit accumulated during the development stage of $426,030, and an increase in warrant liabilities and the convertible preferred stock of $277,562 and $1,681,606, respectively.

In June of 2012, the holders of the Convertible Preferred Stock and the Warrants approved amendments to the Convertible Preferred Stock and Warrants Agreements which removed the conditions which caused the Convertible Preferred Stock and Warrants to be accounted for as instruments separate from equity.

For a full description of the restatement, see Note 2 Prior Period Adjustment of the Notes to the Financial Statements that are included in Part II, Item 8 of this Form 10-K.

The Company has concluded that there was a material weakness in internal control over financial reporting as of December 31, 2011. The Company has implemented remedial measures to correct this material weakness as of December 31, 2012.

ITEM 1.BUSINESS.

General

The Company is a Texas corporation which, prior to 1998, was engaged in the specialty packaging business, primarily as a supplier of packaging products to the agricultural industry. During 1997, the Company commenced an orderly liquidation of its assets (described below) which was completed in 1997. At present, management of the Company is seeking to secure a suitable merger partner wishing to go public or to acquire private companies to create investment value for the Company. For purposes of Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the Exchange Act), the Company is considered a shell company.

History

Prior Business Operations

The Company was established in July of 1993 as a wholly-owned subsidiary of TGC Industries, Inc. On July 30, 1993, the Company purchased certain assets of Union Camp Corporations packaging division for a purchase price of approximately $6.14 million. The assets purchased included substantially all of the business of weaving and constructing Saxolin® paper mesh and polypropylene plastic mesh bagging material for agricultural and industrial applications and substantially all of the properties related to Union Camps packaging division. The properties acquired by Chase consisted of Union Camps plant facilities located in Portland, Oregon, and Idaho Falls, Idaho, and all machinery, equipment, and inventories connected with these facilities.

The Company experienced losses from 1994 through 1997, and in 1997 the Companys secured lender decided not to renew the Companys operating line of credit. The Companys Board of Directors therefore determined that it was in the best interest of the Company and all of its creditors to liquidate in an orderly fashion.

Effective July 21, 1997, the Company sold its operations at Idaho Falls, Idaho, to Lockwood Packing Corporation (Lockwood). The assets sold included substantially all of the Companys equipment, furniture, fixtures, and other assets located in the Idaho Falls, Idaho, facility for a total of $75,000. In addition, the Company sold inventory from the Idaho Falls operation to Lockwood for $255,000. The proceeds from these sales were used to reduce the Companys loan balance with its lender.

On July 25, 1997, the Company notified its creditors by mail that the Company would begin an orderly liquidation of all of its remaining assets, outside of a formal bankruptcy or receivership proceeding, in a manner intended to maximize the asset values. The Company retained the firm of Edward Hostmann, Inc. to assist the Company in such liquidation which was completed during 1997.

Post-Liquidation Operations

Since 1999, the Board of Directors has devoted its efforts to establishing a new business or engaging in a merger or other reorganization transaction and, accordingly, the Company is being treated as a development stage company in accordance with Statement of Financial Accounting Standards ASC Topic 915.

The Company closed a private placement of 13,334 units (the Units) on September 7, 2007. Each Unit was sold for $150 and consisted of: one share of Series A 10% Convertible Preferred Stock ($100 stated value) convertible into 1,000 shares of the Companys common stock (the common stock); 500 shares of common stock; and 500 five-year warrants, each warrant exercisable for one share of common stock at $0.15 per share. Gross proceeds from the offering were $2,000,100, expenses of the offering were approximately $38,000, and net proceeds were approximately $1,962,000.

ITEM 1A.RISK FACTORS.

The expenses related to identifying a target business and to complete a business combination will increase our losses.

Until presented with a specific opportunity for a business combination, we will be unable to ascertain with any degree of certainty the time and costs required to select and evaluate a target business and to structure and complete the business combination. Any costs incurred in connection with the identification and evaluation of a prospective target business with which a business combination is not ultimately completed will result in a loss to us and reduce the amount of capital otherwise available to complete a business combination and thereafter operate the acquired business. We cannot provide assurance that we will be successful in identifying a target business and completing a business combination on terms favorable to our shareholders, if at all.

The tax treatment of a potential business combination is not clear.

We will endeavor to structure a business combination so as to achieve the most favorable tax treatment to us and to the target business and the shareholders of both companies. We cannot provide assurance that the Internal Revenue Service or appropriate state tax authorities will agree with our tax treatment of the business combination.

We have limited ability to evaluate managements target business. We cannot anticipate what role, if any, our management will play in a combined business and whether our management has the necessary experience to manage the combined business. We do not know if we will be able to recruit more management if necessary.

Although we intend to carefully scrutinize the management of a prospective target business before effecting a business combination, we cannot assure you that our assessment of the targets management will prove to be correct. In addition, we cannot assure you that the targets future management will have the necessary skills, qualifications, or abilities to manage a public company. Furthermore, the future role of our officers and directors, if any, in the target business cannot presently be stated with any certainty. While it is possible that one or more of our officers and directors will remain associated in some capacity following a business combination, it is uncertain whether all of them will devote their full efforts to our affairs after a business combination. Moreover, we cannot assure you that our officers and directors will have significant experience or knowledge relating to the operations of the particular target business.

We may seek to recruit additional management personnel to supplement the incumbent management of the target business. We cannot assure you, however, that we will be able to recruit additional managers who have the requisite skills, knowledge, or experience necessary to enhance the incumbent management and successfully operate the target business.

In our search for an appropriate combination partner, we will have to compete with other entities with more experience and greater resources; after a successful business combination we will have to face the competitors of the operating company we combine with.

We may encounter intense competition from other entities seeking to combine with a privately held operating company. Many of these entities, including financial consulting companies and venture capital firms, have longer operating histories and have extensive experience in identifying and effecting business combinations. Many of these competitors also possess significantly greater financial, technical, and other resources than we do. We cannot assure you that we will be able to effectively compete with these entities. Consequently, we may acquire a company with less favorable prospects then we would otherwise prefer, thus making our long-term prospects for success less likely.

If we effect a business combination, we will become subject to competition from the competitors of the acquired business. In particular, industries that experience rapid growth frequently attract larger numbers of competitors, including competitors with greater financial, marketing, technical, and other resources than our resources. We cannot ascertain the level of competition we will face if we effect a business combination, and we cannot assure you that we will be able to compete successfully with these competitors.

The Pink Sheets are characterized by high volatility which may negatively affect our stock price.

Our common stock is quoted on the Pink Sheets under the symbol CPKA. The Pink Sheets, and the price of our common stock, are characterized by high volatility. We cannot guarantee any market for our shares of common stock and cannot guarantee that any stable market for our shares of common stock will develop or be sustained. We cannot predict the effect, if any, that our business activities or a business combination might have on the market price.

ITEM 1B.UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.PROPERTIES.

The Company neither rents nor owns any properties. The Company utilizes the office space and equipment of its management at no cost. The Company currently has no policy with respect to investment or interests in real estate, real estate mortgages, or securities of, or interests in, persons primarily engaged in real estate activities.

The Companys common stock trades in the Pink Sheets under the symbol CPKA. American Stock Transfer and Trust Company has determined that there were approximately 250 holders of record on December 31, 2011. Trading volume in the Companys securities has been nominal. The last reported high and low prices on December 30, 2011 were $0.06 and $0.06, respectively, and the last trade was $0.06.

High and low closing stock prices for the Companys common stock in the years ended December 31, 2011 and December 31, 2010 are displayed in the following table:

2011 Market Price

2010 Market Price

Quarter Ended

High

Low

High

Low

March 31

$

0.15

$

0.05

$

0.14

$

0.14

June 30

$

0.05

$

0.05

$

0.05

$

0.05

September 30

$

0.06

$

0.05

$

0.15

$

0.15

December 31

$

0.06

$

0.02

$

0.08

$

0.08

The Company has never paid cash dividends on its shares of common stock and does not anticipate the payment of dividends on its shares of common stock in the foreseeable future.

ITEM 6.RESTATED SELECTED FINANCIAL DATA FOR 2007 - 2010.

The following selected financial data should be read in conjunction with our financial statements and related notes contained elsewhere in this report and in our subsequent reports filed with the SEC, as well as Item 7 titled Managements Discussion and Analysis of Financial Condition and Results of Operation.

See the Explanatory Note to this Annual Report on Form 10-K and Note 2 to the Financial Statements for more detailed information regarding the restatement of our financial statements for the years ended December 31, 2007 to 2010.

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

Results of Operations (Based on Restated Results)

During the year ended December 31, 2011, the Company had no operations and its only income was from interest income on its short-term investments which are classified as cash and cash equivalents. The Company incurred a loss of $88,620 for the year ended December 31, 2011 and the Company generated an income of $103,038 for the year ended December 31, 2010. The loss was mainly due to the increase in general and administration expenses and the effect of the change of the value of warrants. General and administrative expenses were $105,411 for the year ended December 31, 2011 compared to $88,113 for the year ended December 31, 2010. The Company had interest and other income of $541, and a net loss of $88,620 for the year ended December 31, 2011, compared with interest and other income of $829, and a net income of $103,038 for the year ended December 31, 2010. The changes of the value of warrants were $16,250 and $190,322 for the years ended December 31, 2011 and 2010, respectively.

Accretion of preferred stock to redemption value were $133,340 for the year ended December 31, 2011, compared to $133,340 for the year ended December 31, 2010. Net loss attributable to common stockholders was $221,960 for the year ended December 31, 2011, compared to $30,302 for the year ended December 31, 2010. Increases in net loss attributable to common stockholders were due primarily to the abovementioned effect from the change of the value of warrant to the net income/loss.

Restatement

During the audit as of and for the year ended December 31, 2011, our management reassessed the Companys Convertible Preferred Stock and Warrants issued September 7, 2007 in a private placement, containing term which would have required temporary or mezzanine classification. In the previous financial statements, the Company accounted for the Convertible Preferred Stock and Warrants as equity, and the Company has now determined that the preferred stock portion of the Units should have been accounted for as temporary or mezzanine equity and the warrants as a liability. As a result, the Company restated the 2007 to 2010 financial statements.

Amendments made to the Preferred Stock and Warrant Agreements.

On June 30, 2012, the Warrants were modified to extend the maturity date from September 7, 2007 to September 7, 2014 and to remove the fundamental transaction put feature and anti-dilution protection. On or before June 30, 2012, the holders of the Convertible Preferred Stock agreed to an amendment to the Series A 10% Convertible Preferred Stock which deleted the liquidation provision. As a result, the Convertible Preferred Stock will be shown as equity (rather than temporary equity) in all filings beginning with the quarter ended June 30, 2012. The amendment to remove the put and the down round protection feature allows for the Warrants to be treated as equity for all filings beginning with the quarter ended June 30, 2012. Please see note 10 to the financial statements for further explanation.

Liquidity and Capital Resources

At December 31, 2011, the Company had cash and cash equivalents of approximately $1,485,000 consisting mostly of money market funds and U.S. Treasury Bills. Management believes that its cash and cash equivalents are sufficient for its business activities for at least the next twelve months and for the costs of seeking an acquisition of an operating business.

Net cash of approximately $97,083 was used in operations during fiscal 2011, an increase of approximately $9,000 over the $88,000 used in operations during fiscal 2010. The increase was due primarily to costs incurred in connection with the Companys efforts to effect a business combination and to increased accounting fees for XBRL services.

No cash flows were used or provided by investing activities for each of the periods presented.

Net cash of approximately $0 and $1,180 was used in financing activities during both fiscal years 2011 and 2010.

New Authoritative Pronouncements

See Note 3, Summary of Significant Accounting Policies, in the notes to the financial statements in Item 8 for a full description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein.

Factors Which May Affect Future Results

Future earnings of the Company are dependent on interest rates earned on the Companys invested balances and expenses incurred. The Company expects to incur significant expenses in connection with its objective of identifying a merger partner or acquiring an operating business.

To the Board of Directors and Shareholders of Chase Packaging Corporation

We have audited the accompanying balance sheets of Chase Packaging Corporation (a development stage company) (the Company) as of December 31, 2011 and 2010, and the related statements of operations, shareholders equity, and cash flows for the years then ended and for the period from January 1, 1999 (inception) to December 31, 2011. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Chase Packaging Corporation as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years ended and for the period from January 1, 1999 (inception), to December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the financial statements, the 2010 financial statements have been restated to correct a material misstatement.

Since January 1, 1999, the Board of Directors of the Company has been devoting its efforts to establishing a new business and, accordingly, the Company is being treated as a development stage company in accordance with Financial Accounting Standards Boards (FASB) ASC 915.

Managements plans for the Company include securing a merger or acquisition, raising additional capital, and other strategies designed to optimize shareholder value. However, no assurance can be given that management will be successful in its efforts. The failure to achieve these plans will have a material adverse effect on the Companys financial position, results of operations, and ability to continue as a going concern.

NOTE 2 - PRIOR PERIOD ADJUSTMENT

The financial statements of the Company as of and for the year ended December 31, 2010 and for the period from January 1, 1999 (inception) to December 31, 2010 have been restated as a result of managements determination that the Company had misclassified warrants and convertible preferred stock issued to investors in the private placement offering occurring on September 7, 2007. The warrants and convertible preferred stock were previously reported as equity. Upon further review of the terms of the respective private placement agreements, management concluded that the warrants should have been classified as a liability and the preferred stock should have been classified as mezzanine equity at inception. The warrants should be reported at fair value at the balance sheet date. The convertible preferred stock should be adjusted to its maximum redemption amount at each balance sheet date.

The restatement of these errors decreased the Companys net loss attributable to common stockholders, as originally reported for the year ended December 31, 2010 by $56,982 ($.01 per basic and diluted share) to a loss attributable to common stockholders of $30,302. The restated balances at January 1, 2010 also include a decrease in preferred stock of $17,078, a decrease in additional paid-in capital of $1,516,060, an increase in deficit accumulated during the development stage of $426,030, and an increase in warrant liabilities and the convertible preferred stock of $277,562 and $1,681,606, respectively. The restatement had no effect on the Companys cash and loss from operations or net cash used in operating activities for the year ended December 31, 2010. After reviewing the circumstances leading up to the restatement, management believes that the errors were inadvertent and unintentional. In addition, following the discovery of these errors, the Company began implementing procedures intending to strengthen its internal control processes and prevent a recurrence of these errors.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments that are readily convertible into cash with a remaining maturity of three months or less at the time of acquisition to be cash equivalents. The Company maintains its cash and cash equivalents balances with high credit quality financial institutions. As of December 31, 2011, and 2010, the Company had cash and cash equivalents held in financial institutions that were uninsured by Federal Deposit Insurance Corporation in the amount of approximately $1,485,000 and $1,581,000, respectively.

Income Taxes

The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for operating loss and tax credit carry forwards and for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured assuming enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not those such assets will be realized.

The Company adopted FASB Interpretation of Accounting for Uncertainty in Income Taxes. There was no impact on the Companys financial position, results of operations, or cash flows as a result of implementing this guidance. At December 31, 2011 and 2010, the Company evaluated its tax positions and did not have any unrecognized tax benefits. The Companys practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company currently has no federal or state tax examinations in progress.

Basic and Diluted Net Loss Per Share:

Basic loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding. Diluted loss per share is computed by dividing the net loss attributable to common stockholders by the sum of the weighted-average number of shares of common stock outstanding plus the dilutive effect of shares issuable through the exercise of common stock equivalents.

We have excluded 27,546,000 and 25,683,000 common stock equivalents (preferred stock and warrants) from the calculation of diluted loss per share for the years ended December 31, 2011 and 2010, respectively, which, if included, would have an antidilutive effect.

Recently Issued Accounting Pronouncements Affecting the Company:

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statement.

No current provision for Federal income taxes was required for the years ended December 31, 2011 and 2010, due to the Companys operating losses. At December 31, 2011 and 2010 the Company had unused net operating loss carry-forwards of approximately $1,300,000 and $1,700,000 which expire at various dates through 2030. Most of this amount is subject to annual limitations under certain provisions of the Internal Revenue Code related to changes in ownership.

As of December 31, 2011 and 2010, the deferred tax assets related to the aforementioned carry-forwards have been fully offset by valuation allowances, since it is more likely than not that significant utilization of such amounts will not occur in the foreseeable future. During the year ended December 31, 2011, approximately $510,000 of net operating loss-carry forwards expired.

2011

2010

(Restated)

Deferred tax assets and valuation allowances consist of:

Deferred tax assets:

Net operating loss carry forwards

$

520,176

$

682,408

Less valuation allowance

(520,176

)

(682,408

)

Net deferred tax assets

$



$



We file income tax returns in the U.S. Federal and Texas state jurisdictions. Tax years for fiscal 2008 through 2011 are open and potentially subject to examination by the Federal and Texas state taxing authorities. Tax years 2007 through 2011 are open and potentially subject to examination by the New Jersey state taxing authority.

The following is a reconciliation of the tax derived by applying the statutory rate to the earnings before income taxes, and comparing that to the recorded income tax (expense) benefits:

Year ended

December 31,

2011

2010

Tax benefits (expense) at statutory rate

35

%

(35

)%

Unrecognized tax benefits (expense) of current period tax losses

(35

)%

35

%

Effective tax rate





The Company had no uncertain tax positions that would necessitate recording of a tax related liability.

NOTE 5 - PRIVATE PLACEMENT OFFERING:

On September 7, 2007, the Company completed a private placement, pursuant to which 13,334 units (the Units) were sold at a per Unit cash purchase price of $150, for a total subscribed amount of $2,000,100. Each Unit consists of: (1) one share of Series A 10% convertible preferred stock, par value $1.00, stated value $100 (the Preferred Stock); (2) 500 shares of the Companys common stock, par value $0.10 (the Common Stock); and (3) 500 warrants (the Warrants) exercisable into Common Stock on a one-for-one basis. The proceeds of $2,000,100 were allocated to the instruments as follows:

As of December 31, 2011, warrants to purchase 6,909,000 shares were outstanding, having exercise prices at $0.15 and expiration date at September 6, 2012.

2011

2010

Number of warrants

Weighted average exercise price

Number of warrants

Weighted average exercise price

Balance at January 1

6,909,000

$

0.15

6,909,000

$

0.15

Issued during the period



$





$



Exercised during the period



$





$



Expired during the period



$





$



Balance at December 31

6,909,000

$

0.15

6,909,000

$

0.15

At December 31, 2011 and 2010, the average remaining contractual life of the outstanding warrants was 0.69 year and 1.69 years, respectively.

The warrants, which were issued to investors in the September 7, 2007, private placement offering, contained a provision for net cash settlement in the event that there is a fundamental transaction or results in a Change of Control, then at the request of the Holder delivered before the 30th day after such Fundamental Transaction, the Company (or any such successor or surviving entity) was required to purchase the Warrant from the Holder for a purchase price, payable in cash within five Trading Days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the Black-Scholes value (calculated in accordance with Bloomberg, L.P. using a 180 day historical volatility) of the remaining unexercised portion of this Warrant. Due to this contingent redemption provision, the warrants required liability classification in accordance with ASC Topic 480, Distinguishing Liabilities from Equity, (ASC 480) and were recorded at fair value. In addition, these warrants were not indexed to the Companys stock, and therefore also required liability classification under ASC 815, Derivatives and Hedging, (ASC 815).

ASC 820 provides requirements for disclosure of liabilities that are measured at fair value on a recurring basis in periods subsequent to the initial recognition. Fair values for warrants are determined using the Binomial Lattice valuation technique. The Binomial Lattice valuation model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to maturity. Accordingly, within the contractual term, the Company provided multiple date intervals over which multiple volatilities and risk free interest rates were used. These intervals allow the Binomial Lattice valuation model to project outcomes along specific paths which consider volatilities and risk free rates that would be more likely in an early exercise scenario.

Significant assumptions are determined as follows:

Trading market valuesPublished trading market values;

Exercise priceStated exercise price;

TermRemaining term of the warrant;

VolatilityHistorical volatility of peer companies experienced over a period consistent with the remaining contractual terms of the Warrants;

Risk-free rateYields on zero coupon U.S. Securities with terms consistent with the remaining terms of the warrants.

Due to the fundamental transaction provision, which could provide for early redemption of the warrants, the model also considered the probability the Company would enter into a fundamental transaction during the remaining term of the warrant. Since the Company is still in its development stage and is not yet achieving positive cash flow, management believes the probability of a fundamental transaction occurring over the term of the warrant is approximately ranging from 0.75% - 1.00%. For valuation purposes, the Company also assumed that if such a transaction did occur, it was more likely to occur towards the end of the term of the warrants.

The warrants issued were not only subject to traditional anti-dilution protection, such as stock splits and dividends, but they were also subject to down-round anti-dilution protection. Accordingly, if the Company sold common stock or common stock indexed financial instruments below the stated exercise price, the exercise price related to these warrants would adjust to that lower amount. The Lattice model used to value the warrants with down-round anti-dilution protection provides for multiple, probability-weighted scenarios at the stated exercise price and at five additional decrements/scenarios on each valuation date in order to encompass the value of the anti-dilution provisions in the estimate of fair value of the warrants. Calculations were performed at the stated exercise price and at five additional decrements/scenarios on each valuation date. The calculations provide for multiple, probability-weighted scenarios reflecting decrements that result from declines in the market prices. Decrements are predicated on the trading market prices in decreasing ranges below the contractual exercise price. For each valuation date, multiple Binomial Lattice calculations were performed which were probability weighted by considering both the Companys (i) historical market pricing trends, and (ii) an outlook for whether or not the Company may need to issue equity or equity-indexed instruments in the future with a price less than the current exercise price.

The following table summarizes the fair value of the warrants as of the balance sheet date:

Fair values

December 31,2011

December 31,2010

At transaction date

September 7, 2007 financing

$

70,991

$

87,240

$

141,027

At December 31, 2011 and 2010, the number of shares indexed to the warrants as was 6,909,000 and 6,909,000, respectively

The following are the assumptions for the valuation of the fair value of the warrant liability:

December 31,2011

December 31, 2010

At transaction date

Warrants outstanding

6,909,000

6,909,000

6,909,000

Exercise price

$

0.15

$

0.15

$

0.15

Equivalent interest rate

0.03

%

0.24

%

4.01

%

Expected life (years)

0.69

1.69

5

Risk-free interest rate

0.12

%

0.93

%

4.14

%

Expected volatility

77

%

62

%

53.94

%

Effective June 30, 2012, the Company entered into amendments to its Warrant Agreement. The amendment to remove the put and the down round protection feature allows for the Warrants to be treated as equity beginning with the quarter ended June 30, 2012. As a result, the fair value of the warrants of $70,991 as of December 31, 2011 was reclassified from a long-term liability to a current liability. The fair value of the warrants of $87,240 as of December 31, 2010 was recorded under long-term liabilities.

Series A 10% Convertible Preferred Stock

The principal terms of the Series A 10% Convertible Preferred Stock were as follows:

Voting rights  The Series A 10% Convertible Preferred Stock has voting rights (one vote per share) equal to those of the Companys common stock.

Dividend rights  The Series A 10% Convertible Preferred Stock carries a fixed cumulative dividend, as and when declared by our Board of Directors, of 10% per annum, accrued daily, compounded annually and payable in cash upon a liquidation event for up to five years, as well as the right to receive any dividends paid to holders of common stock.

Conversion rights  The holders of the Series A 10% Convertible Preferred Stock have the right to convert any or all of their Series A 10% Convertible Preferred Stock, at the option of the holder, at any time, into common stock on a one for one thousand basis.

Redemption rights The shares of the Series A 10% Convertible Preferred Stock may be redeemed by the Company, in whole or in part, at the option of the Company, upon written notice by the Company to the holders of Series A 10% Convertible Preferred Stock at any time in the event that the Preferred Stock of one or more holders has not been previously converted. The Company shall redeem each share of Preferred Stock of such holders within thirty (30) days of the Companys delivery of notice to such holders and such holders shall surrender the certificate(s) representing such shares of Preferred Stock.

Liquidation entitlement  In the event of any liquidation, dissolution or winding up of the Company, the holders of the Series A 10% Convertible Preferred Stock shall be entitled to receive, in preference to the holders of common stock, an amount equal to $100 per share of Series A 10% Convertible Preferred Stock plus all accrued and unpaid dividends.

At any time on or after August 2, 2011, the Holders of 66 2/3% or more of the Preferred Stock then outstanding could have requested liquidation of their Preferred Stock. In the event that, at the time of such requested liquidation, the Companys cash funds (in excess of a $50,000 reserve fund) then available to effect such requested liquidation were inadequate for such purpose, then such requested liquidation shall take place (on a ratable basis) only to the extent such excess cash funds were available for such purpose.

Other provisions  There will be proportional adjustments for stock splits, stock dividends, recapitalizations and the like.

The Company has classified the Series A 10% Convertible Preferred Stock as temporary equity because it is redeemable upon the occurrence of an event that is not solely within the control of the issuer.

NOTE 6 - DIVIDENDS:

On November 1, 2010, the Company announced that the Board of Directors had declared a ten percent stock dividend on its outstanding Series A 10% Convertible Preferred Stock. Stockholders of record as of November 15, 2010 received the stock dividend for each share of Series A Preferred Stock owned on that date, payable December 1, 2010. As of November 1, 2010, the Company had 17,078 shares of Preferred Stock outstanding, the total dividend paid consisted of 1,697 shares of Series A Preferred Stock (which are convertible into 1,697,000 shares of Common Stock) and $1,180 cash in lieu of fractional shares. Due to the absence of Retained Earnings, the $1,180 of cash and $1,697 par value of Preferred Stock dividend totaling $2,877 was charged against Additional Paid-in Capital.

On November 1, 2011, the Company announced that the Board of Directors had declared a ten percent stock dividend on its outstanding Series A 10% Convertible Preferred Stock. Stockholders of record as of November 15, 2011 received the stock dividend for each share of Series A Preferred Stock owned on that date, payable December 1, 2011. As of November 1, 2011, the Company had 18,774 shares of Preferred Stock outstanding; the total dividend paid consisted of 1,863 shares of Series A Preferred Stock (which are convertible into 1,863,000 shares of Common Stock) and a total of 14 fractional shares which will be accumulated until whole shares can be issued. Due to the absence of Retained Earnings, the $1,863 par value of Preferred Stock dividend was charged against Additional Paid-in Capital.

NOTE 7 - STOCKHOLDERS DEFICIT:

The Companys 2008 Stock Awards Plan was approved April 9, 2008 by the Board of Directors and ratified at the Companys annual meeting of stockholders held on June 3, 2008. The 2008 Plan became effective April 9, 2008 and will terminate on April 8, 2018. Subject to certain adjustments, the number of shares of Common Stock that may be issued pursuant to awards under the 2008 Plan is 2,000,000 shares. A maximum of 80,000 shares may be granted in any one year in any form to any one participant, of which a maximum of (i) 50,000 shares may be granted to a participant in the form of stock options and (ii) 30,000 shares may be granted to a participant in the form of Common Stock or restricted stock. The 2008 Plan is administered by a committee of the Board of Directors. Employees, including any employee who is also a director or an officer, consultants, and outside directors of the Company are eligible to participate in the 2008 Plan. As of December 31, 2011 no equity had been issued under the 2008 Plan.

ASC 820, Fair Value Measurements and Disclosure, (ASC 820) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels are described below:

Level 1 Inputs  Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company;

Level 2 Inputs  Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;

Level 3 Inputs  Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.

There were no transfers in or out of any level during the year ended December 31, 2011.

Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in the Companys balance sheets, the Company has elected not to record any other assets or liabilities at fair value, as permitted by ASC 820. No events occurred during the year ended December 31, 2011 which would require adjustment to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis.

The Company determines fair values for its investment assets as follows:

Cash equivalents at fair value  the Companys cash equivalents, at fair value, consist of money market funds  marked to market. The Companys money market funds are classified within Level 1 of the fair value hierarchy since they are valued using quoted market prices from an exchange.

Warrant liability  the Companys warrant liability is classified within Level 3 of the fair value hierarchy and the value of the warrants are re-measured every quarters and each year using the Binomial Lattice valuation model with the assumptions as stated note 5.

The following tables provide information on those assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and 2010, respectively.

The Companys Board of Directors has agreed to pay the Companys Chief Financial Officer an annual salary of $17,000. No other officers or directors of the Company receive compensation other than reimbursement of out-of-pocket expenses incurred in connection with Company business and development.

NOTE 10 - SUBSEQUENT EVENTS:

Amendments made to the Preferred Stock and Warrant Agreements.

After review of the Section 5(b) of the original Series A 10% Convertible Preferred Stock and Section 9(c) and Section 9(d) of the original Warrant Agreement of the Preferred Stock and Warrant Agreement, and the resulting accounting consequence as mentioned in note 2, the Company decided to amend the respective agreements to delete these sections. The Company explained to the holders of these instruments that these were unintended consequences, and the holders of the instruments were not materially disadvantaged due to these amendments.

On or before June 30, 2012, the holders of the Convertible Preferred Stock agreed to an amendment to the Series A 10% Convertible Preferred Stock which deleted the liquidation provision. As a result, the Convertible Preferred Stock will be shown as equity (rather than temporary equity) in all filings beginning with the quarter ended June 30, 2012.

Effective June 30, 2012, the Company entered into amendments to its Warrant Agreement. The amendments were as follows:

·Extend the term of the warrants from September 7, 2012 to September 7, 2014.

·Remove the contingent put feature contained in Section 9(c) which would provide the holder of the Warrant a right to put in the event of a fundamental transaction as defined in the agreement (contingent put).

·Remove the down round protection contained in Section 9(d).

The amendment to remove the put and the down round protection feature allows for the Warrants to be treated as equity for all filings beginning with the quarter ended June 30, 2012. The amendments to the Warrants resulted in an approximate increase in value of $10,600 which was based on comparing the valuation of the modified warrants using the current assumptions to the valuation immediately prior to the modification. Because the warrants are fully vested the total was recognized immediately upon modification. A Binomial Lattice valuation model was used to value the instrument before and after modification since this model incorporates assumptions a marketplace participant would likely consider including the down round protection, the fundamental transaction provision and potential for early exercise. Since the majority of the holders of the Convertible Preferred Stock and the Warrants are the same, the amendments to the Warrants were considered as consideration for all holders.